The Perverse Effects of Easy Money

With a few noteworthy exceptions, mainstream academic economists failed to anticipate that the global financial crisis and ensuing collapse of output was even possible. There are several legitimate explanations for this failure, including bad incentives among economists and the absence of a realistic financial system in standard macro models. The most unconvincing excuse, however, is that the crisis was such a freakish event that it was—by definition—impossible to predict. Naturally, this became the academic establishment’s main line of defense.

But there were people who had accurately foreseen what was to come. These were not astrologers who had gotten lucky but serious thinkers who studied the way the economy and financial system interacted with each other. They just had different models and different assumptions that happened to work a lot better—a very awkward fact for academic economists who pride themselves on being “scientists.” As Thomas Kuhn argued in The Structure of Scientific Revolutions, new ideas are rarely accepted by an establishment that did not create them. Thus the mainstream has decided to either ignore or ridicule those who dared to be right. The persecution of Raghuram Rajan for his concerns about post-crisis monetary policy should be understood in this context…

Continue reading at the economist.com…

image: flickr.com/flem007_uk

2012-09-14 23:25:46

Source: http://www.soundmoneyproject.org/?p=8303